STEVEN E. PUMPER: Is the recovery a reality and if so,
will it stay on track or are we headed for a double dip?
ROGER PRATT:Activity has picked up. Over the past six months,
we’ve had rises in job growth, retail sales and hotel occupancy. We’re
doing lease deals in our major markets and, on the multifamily side,
the last quarter saw the biggest absorption of rentals in the past 10
years. So there’s clearly traction. The issues in the Gulf, financial
regulation and so forth, however, are causing a lot of volatility.
JAMES A. STOLPESTAD:The recovery is real, albeit uneven, and
the strongest firms are doing better and the ones that barely made
it through the recession aren’t doing so well. One of the challenges
of the recovery is this uneven headwind from continued deleveraging. So the challenge for all of us is to identify those areas that will
do relatively better or poorer, and plan accordingly.

MARK S. HIGGINS: I don’t think there’s going to be a double dip,
but I’m not an economist. I get my information from our research
group, which is predicting growth of 1.5% to 2%, which is still fairly
anemic. As I heard said by a Goldman Sachs executive on CNBC
recently, “we are not at ‘escape velocity’ at this point and the economy’s still fragile.” The conclusion was that we need 2.5% to 3% GDP
growth to escape the doldrums and have a breakout in the economy
that’s sustainable. Though it’s fragile, our research folks believe the
economy is in better shape than it was last year and is on the mend.
THOMAS D. ZALE: We’re investing as if we’re in a recovery but it’s
going to be very slow. We’re also positioning ourselves so that if there
is another dip, we can defend against it. What makes me a little nervous is that so far, the real estate recovery is a capital-markets recovery; it has nothing to do with fundamentals, though we’re seeing
marginal improvement in multifamily.

Having said that, we’re looking again at development deals that
we first looked at in 2007. The delta between land and construction
costs can be between 20% and 30%. The development cap hasn’t
changed because the rents have come down, too, but you really have
to believe there’s going to be long-term recovery and start getting
behind some of these opportunities.

JAMES J. HALLIWELL: There are two components. The first is
factual—GDP, job growth and other metrics are mediocre, at best,
and a lot of other factors are still extremely fragile. We’re still a very
heavily levered nation. Debt, as a percentage of GDP, has really
gapped out, and that’s worrisome.

“Apartments are trading
off of depressed NOIs
in markets many think
will be the first to
recover. The question
for us is ‘when?’ ”

MARK S. HIGGINS

Cornerstone Real Estate Advisers LLC

With that said, the second factor—the sentiment shift—is extraordinary, on both the capital market and user sides. We own some
barometer-type assets, namely retail sectors such as casual dining. A
year or two ago, that market was totally shrinking. Now, there seems
to be the sentiment among users that if they can open in 2011, it may
not be a bad time. So I’ve shifted from being bearish to cautiously
optimistic.

TREVOR L.
MICHAEL:

There’s definitely
been a change in
sentiment. Last
year, people didn’t
make leasing decisions. But today,
they want to do
deals as they plan
their future business and space
requirements.
People are feeling
better and are
shopping, so our
retail portfolio has
shown substantial
gains. We’re even
looking at further
investment in for-tress-type malls.
Apartments are
recovering slowly
but surely. Office—it’s about the coasts, so we’re looking there. The
capital markets have rebounded faster than expected in New York
City. With some of the prices being paid, it feels like it’s ’06 again.

But I don’t believe in cap rates today, because a cap rate doesn’t
really tell you the story behind an asset. If you’re looking to buy a
property that has experienced rollover in the past 24 months and
the rents are at market, I’m okay with paying a 5% cap rate in markets like DC, New York or Boston because you’re going to see some
rent growth there. That 5% is going to turn into a 6% or a 7%
pretty shortly. But if you buy at a 9% cap rate and you’re 30% above
market, what does that say about your return profile?

MICHAEL G. DESIATO: Have there been enough transactions to sense a trend in cap rates?

PRATT:There’s a lot of capital set aside to pursue the best-of-the-best
assets in the global gateway cities. As a result, you’re seeing assets in

Washington, DC, for instance, trading around a 5% cap rate,
whereas last summer they would have traded for 7% or 7.25%.
That’s a mere 12-month period. The cost of capital on the debt
side has changed as well. With the massive capital out there
and the flight to quality, those assets are getting bid up. On the
other side of the equation, the properties that have severe
trauma are still waiting to be priced out.

HIGGINS:The one place you can talk about cap rates with
some degree of certainty is apartments. That’s the most
sought-after product type right now by institutional capital. We
closed a deal here in Washington, DC about a year ago and it
sold with a cap rate a little below 6%. That same deal would
probably go for less than a 5% cap today, and we’re going to
find out, because we’re currently marketing the apartment
building next door.

Both of those assets were in closed-end funds and we are in
a liquidation mode for those funds over the next 12 to 18

months. They are solid, long-term assets and should do well for the
buyers over time, but they’re going to be great assets for us in terms
of returns, given what they cost us to build years ago versus what
we’re selling them for today.

PRATT:We’ve sold two apartment assets in the past few weeks—
one in Northern New Jersey and one in Carlsbad, CA—and both
sold for about a 4.75% cap rate. They’re good, stable assets and